Crypto-Friendly Environments to Spur Further Growth of Hedge Funds

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The hedge fund industry has grown steadily since the financial crisis of 2008 with the total value of assets managed growing from just under US$1.4 trillion in 2009 to US$4.5 trillion in 2021 according to Statista data. With the high returns that have been seen within the crypto markets, it is not surprising that hedge funds are looking into the crypto space as an investment option for their clients. 

Over the past four years, there has been remarkable growth in the crypto hedge fund industry. According to the 4th Annual Global Crypto Hedge Fund Report 2022 by PricewaterhouseCoopers (PwC), Elwood Asset Management, and the Alternate Investment Management Association (AIMA), the Total Assets under Management (AUM) for global crypto hedge funds grew from US$1 billion in 2018 to US$4.1 billion in 2021. 

For the crypto specialist hedge funds, the report ranked the top locations for crypto fund managers as follows: The United States (30%), the United Kingdom (10%), Hong Kong (6%), Singapore (6%), and Switzerland (6%). However, the top locations for the domicile of crypto hedge funds were the Cayman Islands (40%), British Virgin Islands (13%), Gibraltar (12%), and the United States (10%), and Canada (3%). 

The reasons cited for the choice of crypto hedge fund domiciles were ‘crypto friendly’ (22%), ‘regulations’ (20%), and ‘fund friendly’ regulations (17%). Traditional Hedge Funds cited regulatory and tax uncertainty as the greatest barriers to investing in crypto and in particular the globally fragmented regulatory environment.

Crypto proponents have argued that a crypto spot Exchange Traded Fund (ETF) would provide a low cost and easy access for both retail and institutional investors to invest directly into Bitcoin and other cryptocurrencies. However, the US Securities Exchange Commission (the SEC) has declined to approve crypto spot ETFs over concerns of fraud, limited surveillance, and even manipulation.

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In June 2022, the SEC denied Grayscale Investments’ application to convert its Bitcoin Trust into a spot ETF prompting Grayscale to file a petition against the SEC. This however did not seem to dampen other crypto market players’ attempts to continue seeking approval for crypto spot ETFs. ETF and Mutual Fund Managers VanEck have filed a new application for a spot Bitcoin ETF with the SEC. Spot Bitcoin ETFs already exist in Canada, Germany, Switzerland, and Brazil.

Crypto regulations are again emerging as a key driver for sustained growth in the crypto markets. Crypto market players are seeking investor protection and more clarity on crypto regulations. Traditional hedge funds and crypto specialist hedge funds will benefit from crypto-friendly environments and regulations as these could be the catalysts that spur further growth and enhance crypto adoption into the mainstream.